Small loan rates reach record high

Borrowers taking out small loans last month faced rising interest rates, new data reveals.

According to the Bank of England, a borrower seeking a £5,000 personal loan saw a rise in the average interest rate from 13.35% in September to 13.52% in October - the highest level since 2005.

On a £10,000 loan, borrowers were charged an average interest rate of 10.96%, up from 10.45% during the previous month and the highest level since August 2002.

Moneyfacts.co.uk said the interest on loans increased in October as the Halifax Bank of Scotland group increased its rates on loans by up to 3.5%, while many other smaller lenders also made changes.

Darren Cook, spokesman for Moneyfacts, said: "The HBOS rise was a considerable increase.

"A number of other players also raised their rates. As the possibility of defaults increases, banks are looking at their risk and pricing accordingly."

Rates on other forms of unsecured borrowing also remained high, with lenders charging average interest of 15.86% on credit cards, only slightly below August's record 15.89%.

Overdraft rates were unchanged at 18.96%, 0.01% lower than the high they reached over the summer.

But there was better news on the mortgage front, with the recent flurry of lenders who have cut the cost of their mortgage deals resulting in cheaper fixed rates.

The average interest rate charged on a two-year fixed rate loan for people with at least a 25% deposit fell to 4.33% from 4.47%, while the cost of a similar five-year deal dropped to 5.67% from 5.69%.

A number of major lenders cut their rates during October, including Nationwide, Abbey, Cheltenham & Gloucester, which is part of Lloyds Banking Group, and Northern Rock, in a sign that competition is beginning to return to the market.

The average interest rate charged on a tracker mortgage for people borrowing up to 25% of their home's value rose to 3.91% from 3.90%.

Savers are continuing to suffer in the low interest rate environment, with the returns they can earn on fixed rate bonds falling for the second month in a row to 2.73%, down from a recent high 3.05%.

Fixed rate products have been offering the best returns to consumers as banks and building societies reward savers for locking up their money for a set period of time, enabling them to use it to fund mortgage lending.

But the recent falls in rates offered by these products suggests competition in this area of the market is beginning to ease.

Rates paid on notice accounts also fell for the second consecutive month, dropping from an average of 0.39% to 0.36%, while the interest paid on ISAs and branch-based instant access accounts remained unchanged at 0.4% and 0.17% respectively.